Twists and Turns of Chinese Currency Management

The following news item from Reuters on Saturday (October 2nd) shows some remarkable cunning in an era when accusations are being hurled around about currency manipulation, and especially the Chinese version of it. This version, which is multi-faceted, and includes-- to the annoyance of the Japanese central bank-- the enthusiasm that the PBOC has for buying the yen whenever the BOJ tries to make it cheaper. The current visit by the Chinese Premier to Greece is now providing an opportunity for further magnanimity which could result in a stronger euro, which may not be exactly what Monsieur Trichet has in mind.

(Reuters) - China offered on Saturday to buy Greek government bonds when the country returns to markets, in a show of support for the country whose debt burden pushed the euro zone into crisis and required an international bailout.

Premier Wen Jiabao made the offer at the start of a two-day visit to Greece, his first stop on a tour of Europe, and also said he wanted to boost shipping and trade ties with Athens, underscoring Beijing's use of economic strength to win friends.

"With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue," Wen said, speaking through an interpreter.

"China will undertake a great effort to support euro zone countries and Greece to overcome the crisis."

The last quote is particularly revealing as it achieves at least three objectives for the world's second largest economy:

1. It is a recognition by the Chinese authorities that in a fragile and totally inter-connected financial system, a serious crisis for the basket case EZ economies would be especially harmful to China, which has vast holdings of euros and the government bonds of the Eurozone constituent states.

2. The support of China for the sovereign credits of Greece, and quite likely the other PIIGS economies, will help to further bolster the euro against the yuan. This can only be good for Chinese exporters.

3. Furthermore it could have the effect of diverting attention away from the current antagonism between Washington and Beijing over the artificially low rate of exchange between the US currency and the yuan. Ironically by supporting the Eurozone financial system, and indirectly the euro, it will become harder for the ECB and the Federal Reserve to condemn the Chinese actions, which can only be considered as making a positive contribution from the perspective of helping to avert systemic anxieties.

In the post-2008 meltdown era, the trend towards a more altruistic form of "capitalism", some would even say outright socialization of the global financial system, China appears to be taking a leadership role in recognizing its dependency on the continued solvency of its less dynamic trading partners by rewarding them with pledges of further financial support. In so doing, the Chinese authorities will continue to find even more reasons to continue their policy of "currency management". Perversely, policy makers in the US and Eurozone may not appreciate such altruism.